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Roller-coaster year for financial markets in 2009

“For the financial markets, the past year can be compared to a roller-coaster ride,” Rabobank analysts said.

The crisis peaked in March but the ongoing difficulties in the world financial sector and the deeper-than-expected impact of the crisis on the real economy sent equities and exchange markets into a torpor that only recovery plans and major cuts in interest rates could turn around.

Wall Street’s key indicator, the Dow Jones, for example, fell for the first time in over twelve years to below 7,000 points at the start of March, while the Federal Reserve System launched a 200-billion-dollar consumer aid plan.

Central banks and governments therefore had to try to curb the decline themselves, launching major programmes to buy banks’ unsaleable assets and lowering and sustaining interest rates at historically low levels.

“So far the stimulus medicine appears to be working, because most foreign economies are starting to grow again,” analysts from Wells Fargo Securities noted.

The main world economies, such as the United States and the eurozone, came out of the recession at the end of the summer.

However, even for economies that are growing again, “recoveries are not yet truly self-sustaining,” Wells Fargo analysts warned.

“Unfortunately labour markets generally remain very weak, restraining growth in consumer spending.”

“In absolute terms, what we are really seeing is a meagre recovery. As yet, it is a recovery that does not have a sustainable growth engine and the economic growth in many countries should stay below what we could reach in a period emerging from a recession,” according to Rabobank analysts.

David Woo, an economist with Barclays Capital said “the big question in the mind of investors is to know if the bull tendencies of these past nine months will carry on into next year.”

At Wells Fargo analysts said that in 2010 “we project that the major economies of the world will remain in expansion mode, but we believe that the pace of recovery will remain frustratingly slow.”

Attention is now shifting to developing countries, as “most Asian economies should achieve solid growth rates next year as momentum from the self-sustaining recoveries that have already taken hold in the region should carry over into next year,” according to Wells Fargo.

Foreign exchange dealers anticipate that the Chinese yuan, currently indexed on the dollar, could be revalued to take account of the good recovery of the Chinese economy and the continuing weakness of the dollar.

As exchange markets were strongly correlated with stock exchanges, the dollar has also experienced a jagged year.

It served as a refuge value during periods of concern over the recovery and was attacked each time confidence on the world economic revival increased.

Foreign exchange dealers thus preferred investments that were considered riskier but also more profitable.

The continuing weakness of the dollar has also buoyed petrol prices, which have more than doubled to above 80 dollars. Some analysts predict the cost of a barrel could even go over 100 dollars in late 2010, with continued weakness of the dollar and increased demand.

Another beneficiary of the weakness of the dollar and vague attempts by emerging economies to diversify their dollar reserves has been the price of gold, which has broken record after record in 2009, reaching a historic high of 1,226.56 dollars an ounce at the start of December.

Christopher Barret from Calyon commented that in 2010 “fundamentals [of supply and demand] remain weak, and uncertainty regarding the strength of the commodity markets remains high.”

If world markets have bounced back globally in 2009, the principal fear of markets and commentators for 2010 lies in the worry of a “W” type recovery, a revival that leads to a second dip before a sustained rebound.

According to an analyst from JP Morgan, “the market could come under significant pressure in the second half from interest rate volatility and negative base effects from stimulus withdrawal.”

Caution and low interest rates should remain until the end of 2010 according to optimists. Markets may remain in limbo for another year before the economy gets back on its feet.